When the Marketfield fund sold itself to Mainstay in mid-2012, it got two things:

–the legitimation of being part of a large financial company, New York Life; and, more important,

–it got access to NYL’s powerful distribution capabilities.

NYL, in turn, obtained a new “hot” product, with $2 billion under management, a respectable (if short) track record and a five-star Morningstar rating (btw, according to the Financial Times, Morningstar is now calling the fund a “gateway drug.” It has also taken away two of the fund’s stars.).

terms?

I don’t know. I imagine it consisted of an upfront cash payment to Marketfield, plus a continuing share of the management fee, which is 1.40% for the first $7.5 billion of assets, declining to 1.36% for assets over $15 billion. Doubtless, Marketfield can’t create a competing product.

the product launch

I haven’t seen them, either. I would imagine, though, that the sales pitch would be some version of the free lunch idea–that you get all the upside of an index fund plus considerable downside protection in bad times from the portfolio managers’ ability to sell short

the fund economics

Mainstay Marketfield is a load fund, meaning investors typically pay a sales charge to get their money into it. The rules for how the charge is assessed are complicated. Basically, though, if you have at least $1 million in assets in the Mainstay fund complex after your purchase, you get in for free. If you have $500,000+, the charge is 2% of your investment; below $250,000 it’s 3.5%; below $50,000, it’s 5.5%.

In 2013, Mainstay Marketfield took in $13 billion+ in new money, according to the FT. Let’s say that the average sales charge was 2% (my experience working for a load fund complex suggests the real figure is more like double that, but there may have been sales to large institutions, and anyway let’s be conservative). If so, that total for the year would be $260 million in sales charges. Roughly half would be paid to the selling brokers, meaning NYL netted $130 million.

Let’s say average assets under management for 1013 were around $10 billion. A 1.39% management fee would amount to another $140 million, of which some part, let’s say 25%, would go to Marketfield. That would leave $105 million for Mainstay. (More complications: Total fund expenses, including management, 12b1 fees and short-selling expenses, are around 3% annually. To aid its sales efforts, Mainstay placed a short-term cap on expenses. I’m not sure what expenses are included under that cap or how the costs may be shared with Marketfield. So I’m noting, but ignoring, this.)

Let’s do what securities analysts always do. My sales charge figures is probably too low; my management fee figure is probably too high. We’ll cross our fingers and hope the two errors cancel each other out. If so, Mainstay netted a cool $235 million from owning Marketfield in 2013. Marketfield took in $35 million as well.

2014 and beyond?

2014 will likely prove to be a very profitable year, something along the lines of 2013, despite the fund’s recent woes. Remember, average assets for the year will probably be around $15 billion–meaning management fees would have been 50% higher than in 2013. And there were likely at least some sales in the first half.

I think a lot depends on whether the PMs can stabilize the fund’s performance, and thereby put a halt to redemptions.

If so, the fund may end up with, say, $7 billion in assets–and generate $100 million in yearly management fees.

If not, my guess is that Mainstay will try to sell the fund back to Marketfield or, as mutual fund complexes often do, fold it into another fund concept and have the Marketfield name disappear from the Mainstay stable that way.

It’s pretty clear what needs to be done. The big question is whether the PMs have the willingness.

I’ve been thinking about the Mainstay Marketfield fund. The I shares (the ones with the longest track record) = MFLDX.

Is this a risky fund?

A lot depends on what you mean by “risky.” And a lot depends on the time frame you use.

The standard academic way of assessing risk is to equate it with the short-term volatility of returns. The idea has some initial plausibility. All other things being equal, and for everyone besides roller coaster junkies, a smooth ride is better than a bumpy one. Greater assurance that the price tomorrow isn’t going to deviate much from the price today sounds good, as well.

The main virtue of risk-as-volatility, though, is that it’s easily quantifiable and the data for measuring it are readily available. There’s no need to delve into the actual investments and make potentially messy judgments about what a security/portfolio is and how it works, either.

On this way of looking at things, MFLDX isn’t risky at all.

During late 2008 – early 2009 the fund declined less than the S&P 500. From the beginning of the bull market in March 2009 until mid-2013 it tracked the S&P relatively closely. Less volatile in down markets, average volatility in up markets. Not a bad combination–if this is all risk is.

Regular readers will know that I’m not a fan of this academic orthodoxy–which is, by the way, also universally accepted by the consultants who advise institutional pension plans. It isn’t only that you don’t need any practical knowledge of the products you’re assessing–just a computer and a data feed. Nor is it that my portfolios routinely had part of their excess returns explained away by their greater-then-average volatility. No, it’s that, in my view, for an investor with a three-, five- or ten-year investment horizon whether a security goes up/down a little more or a little less than the market today and tomorrow has very little relevance.

Risk-as-volatility has done serious damage in financial markets in the past. For years, academics and consultants regarded junk bonds as relatively safe because their volatility was close to zero. They didn’t realize that the prices never moved because the securities were highly illiquid and seldom traded. In fact, during the 1990s, i.e., even after the junk bond collapse of the late 1980s, Morningstar continue to have junk bond funds in the same category as money market funds. Since NAVs never moved, the former got all the highest ratings.

Back to MFLDX.

Suppose we look at the fund in a commonsense way.

Marketfield’s website portrays ithe firm as consisting of three principals who concentrate on macroeconomics. The career descriptions indicate that only the director of research, who arrived in 2011, had any prior portfolio management experience.

The group runs a highly sectorally concentrated portfolio. MFLDX can be both long and short. It has a global reach. It can own/sell short stocks, bonds, currencies, sectors, indices.

Despite having all these potentially return-enhancing weapons at its disposal, the fund was unable to outpace an S&P 500 index fund during the first four years of the bull market.

Yes, short-term price fluctuations were not extreme. And I’m not saying that one could have predicted that MFLDX would be down 12% in 2014, in a market that is up 13%–sparking massive redemptions. But it seems to me that risk-as-volatility didn’t come anywhere near to capturing the risk elements present in this fund.

I was reading in the Financial Timesover the weekend about the Mainstay Marketfield mutual fund. It gathered the most money of any mutual fund in the US during 2013, $13 billion, but it is now apparently suffering sharp redemptions after very badly underperforming in 2014.

Mainstay Marketfield

Mainstay Marketfield is the leader among “liquid alternative” funds, which purport to provide the hedge fund experience to ordinary investors like you and me through a mutual fund. Why exactly that’s a good thing is another issue, since hedge funds as a class appear to underperform an S&P index fund on a regular basis (on top of this, the information the public has about them comes from their voluntary self-reporting, whose accuracy academic research has shown to be suspect).

Anyway, on the idea that one can learn a lot by examining things that go wrong, I thought I’d take a look at Marketfield.

Here’s what I found by spending a couple of hours looking at the fund’s SEC filings, the managers’ backgrounds, the Mainstay fund family site and charts of the fund’s performance. The picture may not be complete, but it’s what I think a careful observer would come away with:

–the lead manager has worked in finance, mostly as a strategist, for 34 years. His colleague has 21 years in the business. As far as I can see, neither had any training/experience/supervision in portfolio management before they opened the Marketfield fund in 2007.

–the fund opened to the public in March 2008. It had a period of strong outperformance vs. the S&P 500 during the stock market decline of late 2008-early 2009, when its losses were only about half those of the market. From the bottom in March through mid-2013 it matched very closely the performance of the S&P 500.

–in 2012, Marketfield sold itself to the Mainstay fund family of New York Life. NYL retained the Marketfield managers as subadvisors–meaning the two continued to run the fund. Sales of fund shares skyrocketed once Marketfield hitched itself to the NYL salesforce.

–in late summer 2013, the fund began to underperform the S&P fairly steadily. From the beginning of September 2013 though last Friday, the A shares were down by 8.9% vs. a gain by the S&P of 25.6%. Factor in a 5.5% sales charge holders paid to obtain shares and the results are that much worse.

What happened?

The managers appear to me to be envisioning a world of runaway inflation of the type that beset the US in the late 1970s. In such an environment, it would be important to own shares of companies that could raise prices at an inflation-beating rate and to avoid those that could not. In the Seventies, the “bad” sectors were Healthcare, Utilities, Staples and Consumer Discretionary. The “good”: ones were those that held hard physical assets, like industrial plant and equipment, real estate or mineral resources.

In the 1970s, financials were losers; they issued mostly fixed-rate loans, and they were constrained by government regulations that capped the interest rate they could pay for deposits. In today’s world, those restrictions are gone; loans are typically floating-rate; and the banks can be involved in brokerage/investment banking. So, arguably, financials would be winners if inflation were to accelerate strongly.

Whether this was their thinking or not, this description fits the portfolio they created.

It has no Healthcare, little IT, no Staples, no Utilities (all of which have been the stars of 2014). It also has little Consumer Discretionary and almost no Energy, both of which have been good things.

on the short side

The fund shorted Utilities, Staples, and Retail. It also appears to have winning bets against the euro and the yen, the latter offset by significant holdings in Japanese stocks.

What I find striking is that while the market has been going against Marketfield for over a year, the portfolio strategy I see is basically unchanged.

more going on

There’s also more going on than I’ve been able to see. Everything I’ve said until now would lead me to believe that the fund’s year-to-date return should be around zero …not -12+%.The long US stocks should be up 5% -10% (the only sector in negative territory is Energy). I’m figuring that shorting industries that are, say, +20%, wipes out those gains, but does little more damage because the shorts are a lot smaller than the longs.

So something else is happening. I don’t know what. Broadly speaking, the reasons may be staring me in the face in the quarterly SEC filings I’ve seen (the stock selection looks uninspired, and maybe a little weird–of the holdings, I own only INTC and SPLK–but it’s almost impossible to lose 12 percentage points through bad stockpicking, particularly with the large number os stocks the fund holds). Or there could be transactions that are opened and closed within the quarter and therefore don’t appear in the quarter-end statements.

my take

Th Mainstay site contains a Barron’s reprint from October in which the author touts Mainstay Marketfield as having double the returns of similar long-short funds since the market bottom in 2009. Hard to believe that other long-short funds have lagged so far behind the S&P.

I find the $5 billion in redemptions (about 30% of peak assets) the FT says Marketfield has had ito be a stunningly large amount for a load fund. My experience is that even in deep bear markets load funds have redemptions of maybe 10%. This implies to me that neither the financial advisers who recommended the fund nor the clients who purchased it really understood what they were buying.

What I find most odd is that NY Life, which presumably has an older and more risk-averse clientele, should have chosen Marketfield to offer to its customers. What’s odder still is that the move was spectacularly successful as a marketing move–until the wheels came off the performance.

It will be interesting to see if Marketfield can stage a comeback. If the FT is right about the extent of redemptions (I presume it is; I just don’t know), the first indication will be whether the managers use the selling they have to do to reshape the portfolio. Standard procedure would be to take some of the edge off the losing bets. To my mind, “staying the course” would be the worst thing to do (personally, I think the runaway inflation idea is just wrong). We’ll see when the next SEC filings come out next month.

The US is now producing about 70 billion cubic feet of natural gas daily. On a heat-equivalent basis, that’s equal to around 10 million barrels of oil.

When I was a starting-out energy analyst in the late 1970s, natural gas and crude oil sold for roughly the same amount per Btu. In fact, in some instances, natural gas sold at a premium. That hasn’t been true for a long time. Up until July of this year, natural gas was selling for about $4.50 per thousand cubic feet (Mcf). That’s the equivalent of $30 a barrel oil.

Why the huge price difference?

In the simplest terms:

–natural gas is a good substitute for oil as a heating fuel or for generating electricity, but it has made only small inroads in transportation, and

–because it’s in gaseous form, it’s harder to get from place to place. Gas typically requires a pipeline, which is expensive and suffers from the NIMBY syndrome.

Even though the prices of crude and natural gas have going their separate ways for many years–with gas being consistently much cheaper than oil, natural gas, too, has had its own price collapse over the past six months. Even at what should be a seasonal peak, natural gas is now going for $3.50 an Mcf (the equivalent of $23.50 a barrel), down by almost a quarter since summer.

The two price slides have one factor in common–an increase in production from hydraulic fracturing. The other is mostly a gas thing–unusually warm weather in November and December For what it’s worth, predictions are for continuation of the mild weather until spring.

The main effect of the natural gas price slide has been the obvious one–more money in the pockets of gas consumers. But there have been several others. Imports of natural gas from Canada are down. Imports of high-cost liquefied natural gas (LNG) have dropped sharply. The advantage that the EU’s petrochemical industry, which uses oil as its main feedstock, had achieved over its US counterpart, which uses gas, has abated.

my take

This is a situation where effects are asymmetrical. The price decline is very bad for domestic natural gas producers. While it persists, demand for imported natural gas should be close to zero, although minimum “take” provisions of long-term contracts may force importers to buy at least some amount. Bad for them, too, unless their customers ar contractually obligated to take the pricey stuff.

Because gas is hard to transport, this is a US phenomenon.

We use about 20 million barrels of oil in the US each day. We use the equivalent of another 10 million in the form of natural gas. On a dollar basis, though, gas amounts to only about 20% of overall hydrocarbon spending. So the positive effect of the natural gas price decline will be much smaller than for oil and will be concentrated mostly in the Northwest and Midwest, where the weather is colder and where the pipelines terminate.

Too much traffic and too much last-minute bricks-and-mortar shopping mean that I’m only getting around to this post late in the day ..and that this one will be short.

Reports I’ve been reading over the past month or so say that 2014 will turn out to be a very bad year for active equity managers, in two senses:

–a larger proportion of managers than normal are underperforming their benchmarks. The figure I’ve heard tossed about is a whopping 85% vs. a more “normal” 65%;. Also,

–the degree of underperformance is more severe than in typical years.

I’m assuming that the 85% is before fees. The ideas that underperformance is worse across the board than normal suggests that the number of underperformers before fees could be as high as 75% – 80%.

Two questions:

–since investing is a zero-sum game, whose pockets are filling up with the money active professional managers are losing to the index?

–wha makes this year so different?

Since index funds by definition neither win nor lose vs. the index, the underperformance of professionals must end up either as fee income for middlemen (brokers, marketmakers) or dor investors who don’t publicize their returns. The largest portion of the latter class is individuals, although I find it hard to believe that you and I are beating the index by enough to make such a big dent in professionals’ results. On the other hand, I have no better answer.

The second point is more interesting, I think. On a sector basis, I suspect that professionals had too little IT and too much Energy. 2014 has been a recovery year for large-cap last-generation tech like MSFT (+28%) and INTC (+44%). AAPL, which makes up 3.5% or so of the S&P is up almost 40%, as well. Not having these names would have been costly. As to Energy, it’s possible that many pros bet heavily on rising crude oil prices through offshore drilling companies and unconventional oil sources like tar sands and shale oil–all of which would make the holder exceptionally vulnerable to price declines.

ln my strategy posts, I suggested that, because 2015 would be the first year in a long time in which government policy would not be clearly stimulative around the globe, the fundamental question of whether the near-term market direction will be up or down won’t obviously be “UP” for the first time since early 2009. Not knowing in advance whether to be aggressive or defensive would make portfolio structuring that much more difficult.

In hindsight, maybe the first year of no one-way bet has been 2014. If so, it’s possible that this year’s performance by pros isn’t the outlier. Maybe 2010-13 are. I wonder, in other words, if this year’s poor active manager performance is a harbinger of what the future has in store.

The French building materials company St Gobain recently agreed to acquire control of a Swiss adhesive and sealant firm, Sika, for SF2.8 billion (US$2.8 billion). The move has caused quite an uproar in Switzerland.

The issue isn’t the purchase itself. It’s that Sika has two classes of stock: shares (Namenaktien) held by descendants of the firm’s founder represent 16% of those outstanding, but 52% of the voting rights. St. Gobain is buying out the family at a very large premium. But it has no intention of buying in the publicly held shares (Inhaberaktien) …which have lost about a quarter of their stock market value since the acquisition was announced.

Another day in the life of holders of an inferior security in Europe.

What’s most interesting to me about this transaction is that it’s being offered as a cautionary tale for holders of shares in US internet companies like Google, Facebook…which also have a number of classes of stock, with voting control held by the founders.

While a repeat of the Sika experience might in theory occur in US social media, I can see three factors that argue against this:

1. St. Gobain/Sika is a case of a large company swallowing a smaller one. The US internet companies with voting control by insiders are by and large already whales. Who’s big enough to be the buyer?

2. In my experience, obtaining operational control either through a large minority interest or a small majority–and without the possibility of tax consolidation–is a particularly European phenomenon. US firms typically strive for at least 80% ownership, which allows funds to pass between parent and subsidiary without triggering a tax bill.

3. This is an especially nasty sellout of minority shareholders in Sika by the controlling Berkard family. Perfectly legal perhaps, and a possibility minority shareholders should have contemplated before buying, but nasty nonetheless. For a firm that makes industrial forms of glue, there’s not likely to be significant negative fallout for the business. In the case of GOOG or FB, treating loyal user/shareholders this poorly would be bound to have severe negative business consequences.